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Max’s Cartoon Cakes Objectives • To understand the different types of costs that a business might have • To understand how a firm calculates its sales revenue • To understand how profit is calculated • To understand the link between supply and demand in the cake market The aim of the game is … … to make more profit than the other firms competing in the same market Fixed Costs Costs that do not vary with output eg rent, insurance Fixed costs per month for Max: £4,000 Variable Costs Costs that do vary with output eg flour, eggs, sugar (raw materials) Variable costs for one crate of cakes produced: £1,000 Fixed Variable + Costs Costs = Total Costs Sales Revenue The money received from customers when they pay for goods. Price x Number of goods sold: £3 x 10 = £30 Profit Sales Revenue - Total = Costs Profit (or loss) £500 - £200 = £300 Decisions each month: • How many crates of cakes shall we produce? (Output) • How much shall we charge for each crate? (Price) Price you should charge: Between £2,000 and £10,000 per crate of models Number of crates you should make: Between 2 and 10 crates What I will buy: Cheapest price 8 crates Next cheapest 6 crates Next cheapest 4 crates Most expensive 2 crates Is it a good idea to charge a high price and produce 8 crates of models? True or False? A fixed cost is a cost that does not vary with output True True or False? The money received from customers when they pay for goods is called sales revenue. True True or False? An example of a variable cost is rent. False True or False? Sales revenue is a business cost. False True or False? An example of a variable cost in Max’s business is flour (a raw material). True True or False? If you charge a low price, a customer will always buy your product. False True or False? When the price of a good is increased, demand will usually decrease. True True or False? When the price of a good is increased, demand will always decrease. False True or False? If demand for a product decreases, a firm will probably reduce output. True